Defense modernization to spur growth

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Dec. 4 2020, Updated 10:53 a.m. ET

Defense sector challenges

Beyond 2014, the sector will be faced with two main challenges—how to increase revenues and how to remain profitable.

A number of major defense companies have already cut costs through layoffs and overhead reduction. For example, Lockheed Martin Corporation (LMT), part of the Global X Guru Index ETF (GURU), has reduced its workforce from 146,000 to 116,000 since 2008. Boeing Company (BA), Huntington Ingalls Industries Inc. (HII), and Exelis Inc. (XLS) have also followed suit.

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Any further benefits from this strategy will be minimal. So it’s expected companies will focus on technological innovations to reduce costs. Expensive labor will be replaced by automated processes. Computer-supported design and digital product development will be increasingly used to generate efficiencies.

Fleet modernization

The nature of threat has evolved in the last two decades. Countries face enemies that employ conventional as well as unconventional tactics. To combat unconventional tactics, the developed world has moved toward advanced equipment and big data analytics.

Meanwhile, with some exceptions, notably Singapore, most emerging economies are grappling with aging fleets and equipment. Much of this machinery was bought in the 1970s and 1980s and now needs to be replaced.

Many such countries recognize this need. Singapore plans to invest $2.43 billion to upgrade its F-16 aircraft. The Philippines has bought eight AugustaWestland AW109 utility helicopters to replace its old fleet of UH-1 helicopters. Vietnam is buying twelve Sukhoi SU-30MK2V fighter aircraft from Russia to replace its older Sukhois.

For now, it seems modernization will drive growth in the short term. Particularly, as more countries recognize the need to replace old fleets with newer, more advanced ones.

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